Chinese President Xi Jinping’s recent state visit to the United States may not have resolved any of the most contentious issues between the world’s two largest economies, including tensions over the South China Sea and cybertheft, but the meeting between President Obama and President Xi did bring about important domestic policy commitments from both nations. While much of the news coverage focused on China’s announcement of its plan to create a national emissions trading program in 2017, the two leaders also announced in a joint presidential statement that they are committed to finalizing “next-stage fuel efficiency standards for heavy-duty vehicles in 2016.”
For both nations, reducing consumption through such standards promises to bring considerable economic and energy security benefits.
China’s announcement to match the U.S. timeline for finalization and implementation of these standards in 2019 may have long-term impacts on global oil demand, as the proposed U.S. standards are expected to reduce oil demand by nearly 0.8 million barrels per day (mbd) by 2040. These standards have the potential to provide even more meaningful reductions in oil consumption for China, due to the fact that nearly two-thirds of their transportation energy is consumed by medium- and heavy-duty trucks. For both nations, reducing consumption through such standards promises to bring considerable economic and energy security benefits.
Importance of heavy-duty fuel efficiency standards
In both China and the United States, medium- and heavy-duty vehicles represent a sizable portion of transportation-related oil demand. For example, in the United States, commercial trucks accounted for 2.8 mbd of total oil consumption in 2013, and more than 20 percent of all transportation-related oil consumption.
In noticeable contrast to light-duty vehicles, energy and oil use by medium- and heavy-duty vehicles is forecast to rise, not fall, over the next 25 years from 2.8 mbd today to approximately 3.4 mbd in 2040. This rise in demand is attributable to an increase in the number of medium- and heavy-duty vehicles on U.S. roads (and corresponding increase in total vehicle miles driven), plus only very gradual improvements in vehicle fuel economy. The U.S. Department of Energy’s Energy Information Administration (EIA) forecasts that the average fuel economy of diesel-powered heavy-duty vehicles will increase from 6.15 miles per gallon (mpg) to just 7.21 mpg over the next 25 years.
According to EIA, diesel has been a key driver of demand growth in oil products for China over the last few decades. That general trend is expected to continue, and ExxonMobil currently predicts that fuel consumption for heavy-duty vehicles in China will grow by 130 percent by 2040.
In the United States, fuel economy standards have been used for several decades, and contributed to steady increases in the average fuel economy rating of new light-duty vehicles, especially over the past decade. However, the same cannot be said of heavy-duty vehicles. In fact, the first (Phase 1) heavy-duty fuel efficiency regulations in the U.S. began only last year, while China’s first standards for new heavy-duty vehicles were implemented beginning in July. According to the International Council on Clean Transportation (ICCT), such standards for new heavy-duty vehicles have only been implemented in four countries to date: the United States, Canada, Japan, and China.
Standards bring benefits to industry and consumers
While the U.S. Phase 1 standards (covering model years 2014 to 2018) required only modest improvements in fuel efficiency, additional phases with stricter standards were planned by regulators. China took a similar approach when it implemented its first-ever rules for new heavy-duty vehicle type approvals in 2012.
In June, the U.S. published the proposed Phase 2 rule for model years 2019 to 2027. This proposed rule would require an average fuel consumption reduction of 22 percent by model year 2027 for new vehicles relative to the Phase 1 standards. The rule calculates the increase in efficiency by analyzing the engine, plus several other components of the powertrain, as suggested and agreed upon by industry leaders such as Cummins, Volvo, and others.
The proposed Phase 2 program will save about 1.8 billion barrels of oil over the lifetime of the vehicles sold under the program.
The Environmental Protection Agency (EPA) and National Highway Traffic Safety Administration (NHTSA) estimate that the proposed Phase 2 program will save about 1.8 billion barrels of oil over the lifetime of the vehicles sold under the program. The agencies also project that payback periods for new vehicle owners would be favorable. Under the proposed guidelines, a long-haul truck in 2027 would recoup the extra cost of new technology in less than two years through fuel savings. The payback periods for pick-ups and vans are estimated at three years, and those for vocational vehicles at six years.
These proposed standards would also result in approximately $230 billion in net benefits over the lifetime of the vehicles sold in the regulatory timeframe, while costing the affected industry approximately $25 billion over the same period. Assuming that all savings and costs from shipping goods are passed through to consumers, they estimate the average household could save $150 per year by 2030 and $275 per year by 2040.
Analysis commissioned by Securing America’s Future Energy (SAFE) finds that demand attributable to medium- and heavy-duty vehicles could decline by almost 0.5 mbd by 2030 (~13 percent) and by nearly 0.8 mbd (~20 percent) by 2040 due to the rule. As a result, total on road fuel use could decline by 4.5 percent by 2030 and 7.5 percent by 2040, respectively.
While it remains to be seen if China will adopt a rule similar to that of the United States, China has a history of taking action on this issue. Given the considerable benefits to both households and industry, it is unsurprising that both nations are interested in achieving improvements on heavy-duty fuel efficiency. While only 5 percent of vehicles in the United States are heavy-duty vehicles, China arguably has more to gain as 10 percent of their vehicles fall into this category.
While the world’s two largest economies will continue to have fundamentally different views on many issues, they both will continue to rely dominantly on petroleum-based transportation fuels for many years to come. Both also realize that greater energy security can be achieved through improvements in their respective vehicle fleets’ fuel efficiency, and that medium- and heavy-duty vehicles represent a crucial component of this effort.